- Keurig Dr. Pepper Inc. reported a mixed quarter as they passed on some higher pricing to customers.
- Pfizer beat on the top and bottom line as COVID-19 vaccines continue to contribute to company earnings.
- Amazon reported strong revenue numbers and would have beaten earnings if it was not for the Rivian pretax loss.
- Apple reported a solid quarter despite the headwinds they are dealing with in China on their supply chain and retail footprint.
- Leidos Holdings reported a fairly in-line quarter and the outlook seems solid for the rest of 2022.
Part four of our 2022 Q2 earnings review looks at our positions in the consumer defensive, healthcare, consumer cyclical, and technology sectors. The themes of macroeconomic headwinds (inflation, supply chain constraints, and geopolitical tension) keep on showing up in earnings reports. The stock market volatility and COVID-19 shutdowns showed up in company earning reports as well.
Keurig Dr. Pepper (KDP): The multinational soft drink company reported earnings of $0.39/share (in-line with WallStreet estimates) and revenue of $3.55 billion (beat WallStreet estimates by $170 million). In comparison to our fund estimates, Keurig Dr. Pepper missed our earnings estimate of $0.42/share but beat our revenue estimate of $3.39 billion. We based our estimates on how we thought management would rein in expenses and the strong U.S. dollar would be a hit on revenue.
The company reported revenue growth of 13.2% on the back of a higher volume mix of 3.1% and higher pricing from the coffee systems segment. Packaged Beverages were up 12.8% and Beverage Concentrates were up 22.7%. All segments seem to be churning out stable revenue and the growth in Latin America is impressive. Gross Profit margin contracted by 6.4% as inflationary pressures ate into company earnings and margins. The net profit decreased from 14.26% to 4.13% because of a $169 million loss on early distinguishment of debt. The free cash flow was up from the prior year to $1.15 billion as management continues to execute at a high level. Cash on the balance ended the quarter at $554 million down just $7 million from the same period last year.
In terms of the outlook, management raised its sales guidance to the low double-digit range and reaffirmed its EPS growth. This was a mixed quarter for the company and given the macroeconomic environment this quarter was good. The company is growing at a steady pace and the acquisition of Atypique will add to the growth. In the event of a recession, Keurig Dr. Pepper Inc.’s defensive attributes are favored by investors and if the stock drops below $35/share we are buyers of the stock.
Pfizer Inc. (PFE): The pharmaceutical giant reported a top and bottom line beat as the demand for COVID-19 vaccines is starting to wane. Earnings came in at $2.04/share ($0.26 ahead of WallStreet consensus) on revenue of $27.7 billion (beat WallStreet estimates by $1.5 billion). We thought with COVID-19 becoming endemic and the reduced government spending on vaccines we thought revenue would be affected a tad bit. However, we forgot to account for the increased uptake of Paxlovid (a pill that can be taken when you contract COVID). We estimated Pfizer would report earnings of $1.75/share and revenue of $25.5 billion.
Pfizer reported revenue growth of 46.2% thanks to the strong distribution of Paxlovid and the vaccine which contributed 61% of total revenue. Paxlovid on its own generated $8.1 billion which was higher than our expectations of around $5 billion. The company has a 91% market share of all COVID-19 oral therapies. The gross profit margins contracted 5.7% due to increased costs from commodity inflation. Despite a 27% increase in R&D expenses from the prior year, Pfizer’s net profit margins expanded to 42% (up from 31.9%). Looking at capital allocation, Pfizer is putting its COVID-19 vaccine revenue to good use with strategic acquisitions. The company spend over $12 billion in this quarter as it acquired BioHaven and ReViral. The company is looking to bolster its drug pipeline in areas of migraines and respiratory viruses. The company is still doing actions that are shareholder friendly as it has spent $6.5 billion this year on share buybacks and dividends.
The fiscal year outlook was pretty much in-line with expectations but management warned of a $2 billion foreign currency hit due to the strong dollar. This was another great quarter from Pfizer but the stock sold off on the news that COVID-19 vaccine revenue is going to start to decline starting in 2023. We continue to add to our Pfizer position because we like how the company is recession-proof and it diversifies our holdings. The company’s M&A moves will be able to ward off the patent cliff of drugs starting in 2026.
Amazon.com Inc. (AMZN): The e-commerce giant reported a loss of $0.20/share (not comparable with estimates) on revenue of $121.2 billion (beat Wallstreet estimates by $2.04 billion). Amazon took a $3.9 billion pretax loss on its Rivian investment (an 18% stake in the company). If we back out the pretax loss, earnings would have been $0.18/share ($0.06 ahead of Wallstreet estimates). Compared to our fund estimates, we expected the company would rein in expenses and earn $0.15/share on revenue of $119.2 billion. We thought the strong U.S. dollar and geopolitical tension in Eastern Europe would hamper revenue a
Revenue growth for the quarter was 7.2% which was consistent with the growth from the prior quarter. Amazon had a $3.6 billion effect on its revenue due to the strong U.S. dollar. Outside of Amazon Web Services, North America had 10% revenue growth but International had a 12% revenue decline. The International segment was affected by the Europe slowdown and the Ukraine war as revenue contribution to total revenue declined from 27% to 22%. Amazon Web Services revenue came in line with expectations of $19.7 billion (33% year-over-year revenue growth) and it keeps expanding into all sectors of the economy from healthcare to financial services. Operating margins contracted significantly from 6.84% to 2.74% as the company had to spend extra money to get goods delivered as the supply chain constraints were evident in the quarter. The company’s sales & marketing expenses were up 34.1% as the company is trying to gain market share.
Operating cash flow (an important metric for Amazon) is down from $12.72 billion to $8.97 billion primarily driven by increased inventories up $3.8 billion. The company ended the quarter with $60.71 billion in cash on the balance sheet. The guidance for Q3 was stronger as they expect to generate $125-$130 billion which came in well ahead of the estimated $126.6 billion. The strong guidance was greeted well by investors but it seems like expenses are still not reined in by management as they expect to either break even or make a $3.5 billion operating profit. Overall, this was a better-than-expected quarter from Amazon, and the pretax loss charge on its Rivian stake takes away from a solid showing.
Apple Inc. (AAPL): The iPhone maker beat on earnings and revenue came in line with expectations which is commendable. This is because management gave revenue warnings because of the COVID-19 shutdowns in China. Apple reported earnings of $1.20/share (beat WallStreet estimates by $0.05) and revenue of $82.96 billion (in line with WallStreet estimates). In comparison to our fund estimates, Apple’s earnings were pretty good because we expected them to report earnings of $1.10/share on revenue of $82.68 billion. We thought the company would incur its $4 billion loss in China because of supply chain constraints and COVID-19 retail outlet shutdowns. We thought the strong dollar would hamper the revenue number as well.
Looking at the revenue numbers, Apple posted revenue growth of 2% this is seasonally the company’s slowest quarter as they ramp for the new phone. iPhone Sales came in lighter than expected at $40.7 billion ( a $400 million miss) and this can be attributed to COVID-19 shutdowns in China. The Mac & iPad revenue segment came in below expectations as well with modest misses. The services revenue segment is the fastest growing part of the company as it reported revenue of $19.6 billion and tittering close to hitting the $80 billion annual revenue rate. Geographically, China had the weakest revenue as it contracted by 1.1% as shutdowns slowed consumer spending. The Gross Profit margin stayed intact as it came in at 43.3% ahead of our fund estimate of 42.7%. However, operating margins contracted slightly from 29.6% to 27.8% as a result of inflationary pressures from supply chain constraints. Apple increased its spending on R&D by 18.9% as they look to add to its product line.
Looking at free cash flow, Apple keeps on generating lots of cash for its shareholders as it had $90.6 billion in free cash flow up from $76 billion. Despite a $7.1 billion net decrease in cash, Apple returned $76.1 billion to shareholders in dividends and share buybacks. The cash balance now stands at $48.2 billion. Management expressed confidence in their forecast and the loss in China was not as bad as expected. This was a solid quarter from Apple and we will be adding to our position on any weakness.
Leidos Holdings (LDOS): The defense IT services provider reported earnings of $1.59/share (in line with expectations) and revenue of $3.6 billion (beat WallStreet estimates by $80 million). Leidos’ earnings came in line with our fund estimates of $1.58/share and $3.6 billion. The company has long-term contracts with governments and its revenues are predictable and steady. Leidos had revenue growth of 4% with strong growth coming from Navy, defense, and healthcare management. The company had $2.2 billion in net new bookings and the backlog ended the quarter at $34.7 billion. This past quarter the company won an $11.5 billion contract from the Defense Information System Agency for the next four years.
Looking at the operating margin, there was a slight contraction from 7.8% to 7.5%. There was a 16.1% increase in General Administrative expenses as wage pressure and other inflationary forces increased operating costs. Looking at free cash flow numbers, Leidos had an improvement from a decline of $4 million to $19 million. The company had a net cash increase of $38 million. Cash on the balance sheet has decreased from $727 million to $339 million as management made some strategic moves by acquiring Cobham (Australia’s special mission business) to bolster its revenue segments. The financial outlook for FY2022 was reaffirmed by management as they expect to generate $13.9 billion to $14.3 billion of revenue.
The stock did not react well to the news given how the company is a pseudo-defense contractor that should be benefitting from the increased military spending because of geopolitical tension. Given that reason, investors were expecting guidance to be raised. We are buyers of the stock if it falls below $100/share to add to our position.
Disclosure: Cresco Investments is long Keurig Dr. Pepper (KDP), Pfizer (PFE), Amazon (AMZN), Apple Inc. (AAPL), and Leidos Holdings (LDOS).
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is intended for information, engagement & entertainment purposes only, and is not to be construed as investment advice or direction. Investors are strongly encouraged to perform due diligence and/or consult with their financial advisor(s).
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